Times are tough in Australia as families grapple with the worst cost-of-living crisis in a generation, but Reserve Bank boss Philip Lowe doesn’t think you would want to be anywhere else.
It’s not just because of our world-class beaches.
After a trip to the US in October, the central bank chief has concluded that the economy isn’t actually all that bad Down Under.
“We face some pretty serious challenges,” Dr Lowe said this week.
“But as I listened to the finance ministers and central bank governors in Washington DC, I kept thinking I wouldn’t want to trade our place for anybody else’s.”
Dr Lowe had a point – the old-adage ‘it could be worse’ certainly applies to Australia’s situation compared to the US, Europe and UK.
Inflation here has hit a 32-year high as households pay more for food, energy, petrol and discretionary goods like fashion and furniture.
But prices for those things have risen even faster overseas, particularly power bills, with some European cities staring down rolling black outs.
And while interest rates have risen sharply in Australia in response to soaring inflation, they have gone up slower and by less than overseas.
These are the key reasons Australia is avoiding the worst of the global economic downturn.
Inflation
Inflation in Australia reached a 32-year high of 7.3 per cent over the September quarter, with soaring prices for groceries, energy and rents headlining the squeeze on family budgets.
But as the graph below demonstrates, the pace of price growth has been lower – and is peaking at a more manageable level – than it is in several other markets like the US, UK and Europe.
Indeed APAC economist Callam Pickering said these higher inflation numbers are also the reason Australia’s growth prospects are much better than other nations, where a recession is much more likely.
“The expectation over the next year or two is that economic growth across Europe and the United States is going to slow significantly, with heightened recessionary risks,“ he said.
“But in Australia we’re going to experience a more mild downturn.”
The reason Australia’s growth and inflation outlook is better than it is overseas is two-fold, and both factors have a lot to do with location.
Europe and the US are more exposed to the economic fallout of war in Ukraine, particularly when it comes to energy and global food prices.
Whereas Australia is much closer to Asia, a region populated with the strongest growing countries in the world such as China and India.
And even though growth rates among these key trading partners has slowed lately, it’s still several times higher than in the US and Europe.
Interest rates
Aside from a better growth outlook, the other benefit of lower inflation in Australia has been that the Reserve Bank hasn’t been as aggressive with interest rate hikes as central banks in the US and UK.
Even though the seven rate rises in a row since May are record breaking, the shock in Australia has not been as sharp as it has been for mortgage payers overseas.
Australians are also being spared the worst of rate hikes because we tend to take on more variable rate loans than home owners elsewhere, which Mr Pickering said means the RBA gets more bang for its buck.
That’s because a larger proportion of Australian home owners feel the impact of rate hikes when they happen, meaning we need less of them.
What about wages?
One area where Australia is performing worse than other comparable nations, however, is wage growth.
Australia’s industrial relations system is heavily regulated, and so it takes quite some time for job market conditions to be reflected in wages.
That’s one big reason why our wage growth has failed to keep up with the pace of inflation, despite bosses finding it really hard to find staff.
In fact, real wages (a measure of purchasing power) have plunged at a record rate in Australia in the past six months as inflation has soared.
By contrast, even though inflation is much higher in the US, growth in wages has generally kept pace. The same can be said for the UK.
There is a silver lining here, though. As Dr Lowe said on Tuesday, lower wages growth in Australia is also helping to keep inflation lower.
That’s because when businesses have lower payroll costs they’re under less pressure to increase prices (which could then drive wages higher).
